Don’t Call It QE

in Washington. D c our guests break it down, and if you're here for the craziest things we saw in markets this week, don't worry, we will get to them. Sarah, I'll give you a hint, as as I usually do minds in the collectibles market, and he guesses, I'm I'm honestly a bit worried that we may have the same craziest thing, the worst things that could happen. There's worst things that could happen. And remember that we have our

very own Bloomberg Podcast hotline. Give us a call, let us know about the craziest things that you guys have heard, or feel free to ask us any questions. That number is six four six three to four three four nine zero, and we may even play your message on the show. So, Sarah, as you know, I think the podcast works best when everybody agrees with me. It just seems like the right thing. This has been over the past two epis. Seems like it lends more authority to be on the right side

of history that that sort of thing. But as you informed me, I think our two guests here there might be a chance we'll get an actual debate on the podcast, which which would be exciting so um to me, this is could be the best debate since the is a hot dog of sandwich debate which has has royal many cock ol parties I've been at, and I mean, I'll give my opinion. It's clearly not wrong. Wrong you are.

You've got bread, you've got meat, you've got a sandwich. Anyway, enough of that, let's introduce the guests are first guests. He's actually our first turn guest among U non Bloomberg people, our first two timer. He's the managing director of Global macro Strategy at Medley Global Advisors UH. Previously, he was chief economist and a portfolio manager at Intellectist Partners, and he spent several years at PIMCO out on the West coast, back in the Bill Gross days, and we're proud of him.

Back Ben Emmons, welcome to the show. Thank you very much. Sarah, Mike is really great to be back. Thanks Ben also joining us. Well, this guy is like a three or four timer, but he's a Bloomberg guy, so he doesn't doesn't really count. Uh, he's a cross asset reporter. Lukalla, welcome to the show. Good to be here. It's uh rough to debate someone with the kung fu background of of Ben Buttoh hey, well we'll see what happens. Well, Lincoln Douglas is up. No violence here, we'll keep it

very very g rated. A little violence, a little violence, podcast the violence. But if I remember correctly, the source of this debate stems from the speech that Jerome pal gave this week in which he basically announced that the FED was going to begin buying treasury bonds again, especially on the short end, a lot of treasury notes to sort of manage the yield curve, prevent these inversions. In the shooter ended part of the yield curve that we've

seen so immediately. Sorry. I don't know about you, but my Twitter feed erupted into this is more quantitative easing, and other people say no, it's not quantitative easing. So, uh, luke, why don't you start explaining to us why you believe

this is not quantitative easing. So first, I want to push back on your on your premise some of the some of the things you said there in terms of Powell's justification for returning to purchases of not treasury bonds but pretty much all bills, is the plan as as far as I can tell, he didn't really mention a desire to steep rest deep in the yield curve. That's something you can read into it if you want to.

But he said this is all about maintaining an ample reserve system, focusing more on the liability side of bank balance sheet, make con sure reserves are ample. And for me, what this isn't is quantitative easing, it's quantitative normal ng back. It's an expansion of the balance sheet and the buying of bills in a way that's designed to ensure the adequate transmission of current monetary policy, whether or not the Fed lowers or raises rates From here, would still coincide

with balance sheet expansion. Probably it's not a measure to add additional easing push people out the curve. Removed duration, so you have to move into risk your assets. And I think this kind of distinction is useful and worth noting because the intent of monetary policy matters. Back in the day, pre ninety four, I believe it was, you'd really even didn't get FED statements to know when rates are removing up or down. You had to discern it.

But why by what they were doing in open market operations in excess essentially of what you would suspect they'd be doing in order to kind of manage the reserves in the system. That was the signal. So I think signal and intent matter a lot in monetary policy. Look, you, you're supposed to debate Bed, not me. All right, all right, he's the only one saying wrong things so far. His

he's coming at you. But I have to say Ben was pretty rebellious this week because Jerome Howell must have said about five times in his speech did I mentioned that this is not quee? And then Ben goes ahead and sends around an email to his clients and the title of it is call it a quei comeback. So, Ben, why don't you give us your take from your point

of view? Why can you call it a quwie come back? Yes, I think that and two two looks point like, look as we fair that you are buying treasury bills and you injecting reserves back in the system, and fair enough, this is what the Fed would do since fourteen. Sorry

see traditional function of the fellow reserve. But let's think about it this way, like, we are in a situation where two years ago we started a normalization of the bound she's and we contracted the reserves, and we built this pretty big gap between currency circulation and reserves in

the system. And that has become a pressing issue. So as Bau goes ahead and try us to fill that gap, he's gonna have to buy these tea bills to do that, right, He's gonna have to buy from dealers, right, and then those dealers have new reserves and banks are new reserves, and then there will be another let's say conversion in fact, if you're called that way, of something happening with those reserves.

Why did we ended up with this repot issue in September because a lot of banks that hoard of reserves, banning a few banks held a lot of reserves. So they try to resolve that. But if you didn't think about what que actually did. There's two ways to think about it, right. One it is a duration of fact, just as you buy a long day of securities and you you push people out in the respectrum. The other part is it that you are providing let's say, a

real cushion to the system. One reason why we want to really happen was to try to really resolve the frencial crisis and the liquidity aspects of that and the distress that happened. We don't really deal with that right now, but we do deal with a quickly issue, so to speak.

So if you cushion the system with a let's say very af acid which is the excess reserve, by driving up the price of the risk free asset, which is the d bill, then you will get some sort of idea that people will will at least respond to it and say, Okay, there's a cushioning effect in the system. I'm going to do something else, right, I'm gonna take

perhaps more risk or at least some enticement. And this may be the debate right where we don't debate so much about buying interior treasury bonds and that's QUE right, more about what will this program ultimately resolved into how people will behave as this question. The motivations may be different, but the the reaction will be similar in markets. I want to say, just to like back up Ben's point

to a certain extent, go against myself. What you saw in markets, especially on Tuesday, there was this big twist steepening of the curve, and steepening in a trade like that is typically associated with what we saw right before QUE two and UH and following on from that in August of and again when we were talking up the

possibility of q E three. So essentially what this is intended on doing, whether it's a problem with anything with the with the reserves of the system, with bank liquidity selling and so forth, it's effectively serving as forward guidance, which is pushing short rates down and removing more deflationary tail risk negative risk asset outcomes. And you saw long

bond yields go up. So hey, if the market thinks it's kuwi and wants to act like it's QUI in a way, who am I to say it's not I think you just conceded defeat their Luke, I'm not sure is that? Can you can you see the threatening motions that Ben is making at Ben's practicing kung fu in his seat. But I want to ask you then, Luke. I mean you can make the quip that markets are

never wrong. But if you look at the spread between three month treasury yields and tenure treasury yields, I mean we're now back near the vicinity of being in positive territory. I mean, can you make the case then that if this isn't que then we're seeing markets act the wrong way, uh potential. I think you can make that point. However, I think this week and I'm sure we'll get to this.

It's kind of important to note that this wasn't happening in a vacuum, and in fact, even during Powell on Tuesday, some of the h was taken out of his remarks by the fact that you had trade headlines hitting fast and furious and kind of either whip sawing and negating the effect or in some cases accelerating it. And what we've seen essentially since that point is more positive than negative. Trade headlines, and that's a reason why the tenure yield

has kind of risen as dramatically as it has this week. So, Ben, you gave a TV interview to Bloomberg TV earlier this week where you talked about this whole issue and um, how you see the rest of the year shaping out? And we wrote a story on it. The headline was shades of two thousand and eighteen route coming for markets this quarter. Emmon says, that's that's a scary headline, Ben, But I just wanted to sort of go through your rationale. You don't think, um, that this will solve the repo,

which you the funding issue as we get towards year end. Um, you say, uh, this will take some time to catch up. It may alleviate at some point a bit of the funding pressures that we see, but it will not be by year end. It will be more by the second quarter of next year. So walk us through a little bit more how you see the rest of the year shaping out. It sounds like you're you're pretty cautious for

the fourth quarter. Yeah, I am, man, Mike, because um, although this is a really good step at these to address it more permanently, in the sense, and they still have to, by the way, announce the permanent repo facility that it's not there yet. It may happen October. We don't know yet yet, but it's like in the air um. But most of all it will it will take a number of months to ramp it really up right, they would have to buy at least a hun to on a billion or so of de bails to make that difference.

Then we're dealing with this redistribution issue of reserves that is still happening, and then we're dealing with just the year end effect in itself. Right, And if you this is actually what where I'm coming really from, is that since when the Basil three agreement may changes to let's say, leverage that banks can have on their bound sheet, particularly over year end, there's a lot of there's a lot

of constraint on that. Now this is actually limited the ability of companies and others to fund themselves over year and they all go to a really small door, so to speak. And we've delvet this repeatedly, so we're dealing with it this year too. One way to look at it is the technical part of the market is the currency market, where you have basis swaps right where you can have swap floating rates with one another. That gives you sort of a sense of demand for dollars in particular.

Now we're also coming off of really a tense period in August of flight to safety. There's other signs there that there's been a fair amount of dollar issuance happening in Asia, right, that's I think all of rush for having dollars before the end of the year. There's generally, I think just a demand for dollars in itself, which have nothing to do with the value of dollars, just demand for dollars. So we were in a pretty tight situation.

So this program that they're talking about will make some difference, but not immediately. Um. In addition that you if you do deal with this constraint in itself, then you're going to get the same sort of sort of gaveway, a really tight gave way to get through. And if we're then dealing with everything that comes ahead of us now, the trade talks, we don't know how it ends, right, So the tears that come into effect perhaps next week and in December, other than certainty we know the drill

of that, So it does. It does keeps us in a really tight environments. And that's the caution that I have, you know, and and it will that be the chase of Tony eighteen. Yes, that looks like a bit like that, um and that depends, of course, to on on all the geopolitical developments. But we have a lot of that this time, right, not forget what's happening with Turkey Syria, which is very politically charged, and that also China is

involved in that too. There's all of that political aspect there to that markets are in a bind here, and to piggyback on Bend's point, they're like that that is trying to essentially help with the amount of water going

through the plumbing here and and loosen that up. But the size of the pipes is really what's going to become an issue at the end of Q four And Bank of America had kind of a recent note uh talking about just GA regulations and the desire of big banks to avoid search charges on their assets, and that means, you know, essentially slimming down on your assets, which obviously has ripple effects beyond in terms of those who need financing or have finance positions currently and it's kind of

same as it ever was. It is shades of eighteen there and that you know, you see some banks that are right above a level where if they just got below it would be a lower charge for the next year. So that means they have the same incentive to kind of retreat from a market, the market in the way that they did in Q four that had people just crying about how bad liquidity was and really seeing a lot of the gaps you got during that time, it really makes you wonder if they shouldn't do say assets

over a period rather than it doesn't. It doesn't make you wonder that that's not how the Basil agreement works. And ultimately the Basil Agreement actually is overlapping agreement that all banks do have to comply with, even though the domestic regulation may be a bit different. It has been an interesting repeating a phenomenon of the last four years sixteen eighteen and now right so, and every time that the tensions get build up that year and effect becomes

more severe. So this year too, we have plenty of reasons to be really cautious. So I am with look that on that way is that we're going to go through small door. There's gonna be a lot of parties have to all go through the small door, and whether the fetes there but this repoperation or not. I don't think that the tightness in the markets will necessarily change

as it was then. When you talk about shades of eighteen, especially being at the beginning of the fourth quarter, a lot of people will picture the near death experience of the ballmarket that we experienced last year. But many would point out the fact that interest rates are much lower clearly than where they were back then. How does that change the picture heading into this quarter and then maybe even into as well, because as we all know, the fourth quarter was pretty rough, but then we saw a

very steep rebound. Yeah, And I think that's an interesting point because you were talking here about then the macro reasons of why there's caution that, yes, we have hunter based point basements, more of lower rates, with rate cuts everywhere. There's a lot of focus on to try to avoid the tradeboard turning into a global recession, so not our insurance being put in the system. That's completely opposite from

last year. Clearly, at that time, we were actually very confident that we had a very strong outlook and it was more about talking about tightening, and in fact emerging markets, in particular central banks there had had the tighten because they dealt with pressure on their currencies. So we're really

opposite situation on that front. But that all said, like, I think the complexity of the trade war has has compounded since that time, and there's so many layers have been added to with that, although not not not all of that has been yet really implemented the market clearly discounting that's a scenario that makes the economic scenario a lot worse than what we had before. They say at least six months before, you know, the complexity vally pent up.

So I think that that the year end situation on that sense is not different than last year in terms of having tension about where we're really handing with trade brackits, golf tensions, etcetera. The uncertainty is just much more elevated, and that is not I think it's something that low rates have yet the offside where they have not really

upsettled uncertainty. And if you look kind of at the the history of the market from eighteen to the present and especially during the risk of episodes a February UH of alpocalypse and q FO. To be clear, it's it's very evident that these don't appear to be broad macro issues. It does appear as though market structure and liquidity concerns just become the overriding factors, like we've had over the

past couple of years. I'd say we're up about twenty percent and earnings are up about but the time periods in which those have occurred are completely divorced from one another. So I think, you know, the kind of stocks follow fundamentals, yeah, over the long haul, but we've seen kind of market conditions play a bigger role, especially in our risk off episodes, you know. But I wanted to go back to something you mentioned, Um, the Turkey invading Seria situation. UM. I

know that Lira was weak, the Turkish lero was weak. Um, is there any other risks from that scenario that we need to think about. Have you seen any sort of contagion in markets elsewhere or is it just add on top of the sort of global geopolitical uncertainty that we have all over the place. It's an add on and it will be local and it will be very fact you know, impact on Turkey itself. And obviously the region and you know, looking Syria has been a war going

on for eight years. But I think the political angle there was about the curves right who holds so many of these ices fighters and the subsequent flood of again of refugees out of Syria coming into Europe. Right, So you have Europe there in place, and you have the US focus on as and obviously the let's say, the criticism on on the on the turner from took on this on this policy related to Syria. This is another

political angle here. I think that's new. It won't really impact i'd say trade talks or or or another sort of event. It's just add on um contagion to other uh, locally emerging markets is not there, other than if it were the fact that say the Turkish banks again because Leira weekends in the banks at no liquidity anymore, etcetera. That you know, there's some banks in Europe that have lent lots of Turkish banks and they and Turkish banks are very religned on dollar funding, so that could be

dead tension. You know, resurfacing has happened before, you know, when Turkish LEARR was on a lot of pressure and Trump had at a big skirmage with icon as I think twenty seventeen, so maybe something like that. Other than that, I don't think it's brons Contagian issue. Well, for first, like I think you know, this is probably first and foremost in everyone's mind, more a moral issue than anything.

But when it comes to the potential market impact, I think one extra way you could see this is some potential read through between this and the possibility of the president being impeached or that impeachment then being successful, and

the Senate to the extent that matters to markets. Because if there's one thing that several Republican senators have not liked them have been happy to voice their disapproval on this week Marco Rubio and Lindsay graham Uh in particular come to mind, it's that they very much do not

agree with this or in policy decisions. So inasmuch as the president's constituency right now is is very dependent upon his party, and particularly his party in the Senate, in order to retain control, this is one way in which

he perhaps might be undermining his support. Because this has been a topic of light and we've discussed it on a couple of the past episodes been Let's get your view, I mean, thinking about impeachment and the markets, what is the relationship if at all, I guess the relationship is not about the faults of you know, treasury debt. I

wouldn't strongly emphasize that. I don't think that has anything with one and on it to do, because that's would be people's first maybe thinking is said, we're going to get a default over getting a very weak dollar. Neither

has happened so far or will happen. I think, um, it will be disruptive, of course, because any political leadership change causes again additional uncertainty will be here the case two if you really think about it, we have not had a political crisis like we've had in Europe for example, including what's happening with the Brexit it. So it will be a really, I think, will first constitutional political crisis that you know. Ultimately, I do think markets will react

negatively too. In a sense. It is disruption. It's uncertainty. If you do think back of the Nixon era when you know it wasn't impeached, but he ultimately left the White House. There was a lot uncertainty after that, right and how things would unfold, so that boy would definitely affect markets, but I think that it is a otherwise, it's more of an issue that it will be about the election, how to shape South, who will be the new Republican front runner there? That particularly, I think, and

that's more political. I think that would not have impact on markets. I think the only thing you could see about this then is that the dollar actually ironically continue to strengthening because it's just to flight safety effect from the uncertainty. Yeah. Interesting, the pound did strengthening quite a bit on Thursday when Boris Johnson and the Irish Prime Minister met. It renewed optimism that maybe they will in some sort of agreement before the Brexit dropped dead deadline.

What is your read on how that's all going to shape out? I mean, I think the pound went from like a dollar twenty two to above a dollar. Have we seen the loads in the pounder? Or is there is there danger for a big crash if this stuff falls through before the end of the month. So the good news actually is with with the brexits two things. Actually one day passed a law through the House of Comments that they could not leave the EU with without

a deal. That's pass. So no matter what happens between now and the end of October, Boris Johnson or someone appointed would have to go to the EU for an extension. That's very clear. So we won't get this hard accit. As I said before, the Bank of England and the e c B have done some pretty good background works to control the followed in the derivative markets so that it won't be a financial systemic effect either if there's a Brexit, and that's why markets have always been pretty

calm about the Brexit headlines, other than just general uncertainty effect. UM. Of course the pounds has upside here if if it does lead to the resolution finding the Brexit is behind us. If anything is just a relief right like the three years of this UM. But the most likely outcome so far still is that UM, if you do not leave the the the EU on the so without a deal on the one, then it will be new elections. Obviously that will be happening in November and a number of

months during that extension time new government. That what happens was that Boris Johnson Matt with the Northern Irish Prime Minister and they find a way. I guess to keep the e the Northern Ireland into the EU on a certain code and it's a very technical thing, and that would be then to to the sort of a piece of of of the government, not only the government but

other opposition parties except the Irish d d UP. They would be against that still, but it would be just enough to actually say now we can actually have to withdraw agreement work on the technicalities of the hardboard around Northern Ireland, which has been the big block you know,

against that Brexfit conclusion. But they say it there is still a lot of work to be done, So I would I would be still in the camp of saying we're gonna head towards the ENNA in a month with a no deal action that leads to you know, new elections in the UK and more broadly stepping back. When you take a look at Thursday's price action, this could be peak policy maker optimism that we've kind of ever seen,

at least so far this year. If you can look at a day when cable the pound against the US dollar is up about one five and U S docks with heavy exposure to China are also up one point five percent, those two things don't happen together. We don't suspect that global policy makers are going to avoid worst case scenarios and rally like that on both legs that often. So this that's kind of something to keep in mind going forward. Thursday's a pretty special day when you look

at global markets. So far, everyone just decided to be really up to the bias definitely seen to be towards positive outcomes all around, which you would think maybe people would have learned their lessons by hour or maybe and my just my too, Synacole. Then no, you're actually right, and I think there's still a lot of caution out there.

I mean a little move of rates, but it's very limited if you actually look at I mean it's a great point by way by by look to look at those two items that's directly linked to these two two deals. But if you if you look at the ranges, the SMP is still within the August range, right at what all the stress happens, Tang year is really at a low range, dollars stronger, Still not much movement there, gold is up, etcetera. There's a lot of caution. Um, you know,

it's great if we get optimism. I'm just I think a lot of investors field. This is more of like that's a little bit of liquidy gap there that optimism. That why Marcus move up waiting for this ultimately what what will be the resolution in both cases, which you know, again we don't know. I think you could maybe call the optimism crazy. I think you could, and I think that is a good segue to the craziest things we saw in markets this week. I believe we got a

call into the what Goes Up hotline? Is that correct? We did. It's from Gerald who is actually in Hong Kong, and he's pointing out the fact that all in this week China announced that it will actually encourage foreign financial institutions and funds to invest in their financial markets, and at that same time, Bloomberg reported further about trying to bar capital flows into China that is out of the US.

So take a listen. So if I just arrived from Mars, I could be confused which country represents capitalism and free markets and which country is run by authoritarian communist But then again, these days Hong Kong itself is a bit like Mars, especially on the weekends. Thanks by It's a great point. I wonder if these, uh, the Chinese officials are eyeing all that NBA money that came into the country and and some some good potential investors there. Perhaps

it's pretty blue Will. Supposedly Houston Rockets jerseys have just come out of Nike stores in China. Yeah, yeah, that's that's interesting. I mean that who would have thought that's where the tensions would escalate. But hopefully, hopefully there's peace on the horizon. All right, Luke, can you beat that craziest thing? I think I might be able to. And it's because I think this one I'm really playing to you,

I know you kind of like the legal ones. And I'm also playing a bit to Sarah here because I think she might have had a family member that did something along the same lines, except a lot less criminality involved.

To tell that story a little later, So there's a fourteen count indictment unsealed against the citizen of Singapore alleging, essentially that he hijacked and did some identity theft with a prominent California video game developer to often open cloud computing accounts so that he would be able to have

computing power to mine bitcoin and ethereum. Apparently about five million worth of cloud computing employed here, and at one point they believe he was actually one of the biggest users of Amazon Web services by volume at the time, based on how much he was told an employing towards this tax. So I think that's the that's the craziest thing I've got for you. That's pretty good. That's pretty good.

So do you buy Amazon then? Or do you buy And by the I think I'm gonna have to call my brother after this and make sure all is good in the world. He used to mind bitcoin and he's a very good ex professional video game player. So the two my cross we might have a witness to this week. Alright, man, that's a tough one to beat, can you top I'm not even sure what exactly went on there. Some guy hacked into the cloud and was mining bitcoin. I'm gonna

try it. Yeah, I'm gonna completely the other way in terms of let's keep to stick to the markets, let's keep it boring, boring, and let's go back to the e c V with their issues right as in the Financial Times with borders. That's the ECB officials had such a clash with each other abouts this que decision. But if you then read the minutes from the c B. There's nothing of that in there. I thought, this is really crazy, like this game be right they you know?

So I'm not aware to say it's just the usual europe Being way of communicating with one another, which means, by the way, just like with the Brexit, and just like with that situation, there's always what I called European they get together, they kiss each other, lily on the cheek, on each other, and then it will be that's the craziest therapean way. It sounds like whoever the secretary was that type those up those minutes should be promoted to diplomatic. Alright, Sarah,

can you beat that? All right, I'm gonna rip off the band aid and make sure that we don't have the same one today. Mine is kind of a follow up on something I've touched on in the past, and that is Treasury Secretary mnutions father with art. Can we get a confirmation that it's not the same the same? Great love it? Um? So the headline and the story is Mnusian's dad is selling dakooning for as much as

thirty five million dollars. And I know in past times on the show we talked about the stainless steel Bunny that he had purchased on the behalf of hedge fund manager Steve Cohen for about ninety million dollars. Well, this time around he is selling a painting. It's actually titled untitled twenty two, which makes me think we're there twenty one other untitled paintings. Funk forty nine by the James Gang. Yeah, but for thirty five million dollars. Thirty five million, and

you don't you don't even get a title. You don't even get a title untitled two. All right, Well, I'm gonna concede defeat to you, because that's pretty good. Mine's also from the collectibles market. But I got I gotta set up with a little childhood story when when I was a young baby, really uh you know, one of seven kids, youngest of sevens my parents had They drove us all around in this beat up old Volkswagen minibus from the sixties, and there were so many of us

in it. Like when you go up the hills, sometimes some kids would have to get out so that it could make it all the way up. It's like the bigger kids would push so piece of junk car, right, So my brother sends me a link today nineteen sixty Volkswagen minibus granted this one's in mint condition. Then take a guess on what it's uh, it's it's up for self for a thousand dollars close hundred and one thousand dollars.

And what's interesting is my childhood house recently went up for sale and the asking price was only about double of what our childhood car was. Tells you something about you know, buy and hold what exactly you should be holding. That's on Classic Auto Mall dot com. So if any listeners want to buy that, I hope they give me a ride some day. But anyways, living it there Ben Emmon's Lukawa. Thanks so much for joining us on the show to day. Thank you very much for having thank

you what goes out. We'll be back next week. Until then, you can find us on the Bloomberg Terminal web site, an app, or wherever you get your podcasts. We'd love it if you took the time to rate interview the show on Apple podcast so more listeners can find us. And you can find us on Twitter, follow me at at Sarah Pontzack, Mike is at your anonymous and Luke Kawa is at l J Kawa. You can also follow Bloomberg Podcasts at podcasts. What Goes Up is produced by

tober Foreheads. The head of Bloomberg podcast is francesco Leavie. Thanks for listening, See you next time.